Occidental Petroleum (NYSE:OXY) will forever be known to business history for one stupid decision.
It beat Chevron (NYSE:CVX) to Anadarko Petroleum last year for $55 billion, 80% of it cash. The market cap of Occidental entering trade for the second half of the year is $16.77 billion.
Occidental blames the coronavirus, which took the price of oil from $52 a barrel to a low below $13 during the lockdown and Saudi price war. The price has since recovered, trading at $39.59 early this morning. So has Occidental stock.
But the damage remains.
Toting Up the Damage
For Occidental, that damage includes a write-down of $6 billion-$9 billion in oil and gas assets just this June quarter, on top of $2.2 billion written off in the first quarter. It means Berkshire Hathaway (NYSE:BRK.A), which helped fund the Anadarko deal with $40 billion in preferred stock, will be getting stock this quarter instead of cash. Other shareholders will only get a symbolic 1 cent per share dividend. In 2019 the company paid $4.70 a share in dividends.
Occidental will have to buy back $9.12 billion of expiring debt over the next two years with new notes instead of cash flow. It began that process June 26 with a sale of $3 billion in debt, at interest rates of 7.75%-8.75%.
Management, which thought it was becoming a dividend aristocrat with the Anadarko deal, now finds itself among the industry’s “dead men drilling,” existing to pay off debt. There was nearly $37 billion of debt on the balance sheet in March. The figure was $48 billion the previous September, after Anadarko closed. What seemed like a cash flow molehill has become a debt mountain.
Still, Buy It?
Berkshire’s preferred stock stake carried an 8% dividend. When the dividends are paid out in stock, they represent 17.27 million new shares each quarter. Occidental has about 917 million shares outstanding.
While selling new debt keeps Occidental alive into 2023, there’s another $5 billion of debt maturing by 2024, not including any three-year notes that are in the new financing package.
Despite this, Occidental shares are up over 50% in the last three months. Most of the gain came in early June, as OPEC+ production cuts sent oil prices back up. InvestorPlace contributor David Moadel even called Occidental common “attractive” on June 23. Analysts at Truist (NYSE:TFC) unit Robinson Humphrey and Bank of America (NYSE:BAC) recently upgraded OXY to “buy,” citing the OPEC+ production cuts.
If production cuts can take oil back near its $60 pre-pandemic price, and if Occidental can keep selling assets at good prices, it could generate cash flow to pay down the debt. That’s a lot of ifs.
Occidental generated nearly $2.5 billion of operating cash flow in the September quarter. It still had $948 million in March, as the pandemic took hold. If 2021 starts to look like 2019, with shale oil production cut and OPEC disciplined, bulls believe, the company can get back on track.
The Bottom Line on OXY Stock
Right now, OXY stock is speculative, a leveraged bet on higher oil prices that even our Louis Navellier won’t recommend. Fellow contributor Josh Enomoto thinks the stock has gotten ahead of its fundamentals. But fundamentals don’t matter to speculators.
Even Warren Buffett isn’t sitting pretty. His 8% sure thing has become stock that must be sold for him to realize gains. If the market sees he’s selling, the price of the stock could plummet. His $40 billion stake would take a huge loss in bankruptcy. For now, he’s tied to Occidental like Ahab on Moby Dick.
The good news is you don’t have to be.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
